Unifi Inc (UFI) 2007 Q1 法說會逐字稿

Good morning, my name is Kathleen and I'll be your conference operator today. At this time I'd like to welcome everyone to the Unifi First Quarter Conference Call. [OPERATOR INSTRUCTIONS].

Thank you. It's now my pleasure to turn the floor over to your host, Mr. Ron Smith, sir you may begin.

Thanks, Kathleen, and good morning everyone. This is Ron Smith, the Treasurer and Head of Investor Relations for Unifi. Joining me for the conference call today is Brian Parke, our Chairman and CEO, and Bill Lowe, our Chief Operating Officer and CFO.

During this call we will be referencing presentation materials that can be found on our website at www.unifi.com. The presentation can be accessed by clicking the First Quarter Conference Call link, found on the Home page. I hope that you have the presentation available, as it will make it much easier to track through the information discussed in this call.

Before we begin I need to first advise you that certain statements included herein may be forward-looking within the meaning of Federal securities laws. Management cautions that these statements are based on management's current expectations, estimates or projections about the markets in which the Company operates. Therefore these statements are not guarantees of future performance and involve certain risks that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted, or implied by these statements. I direct you to the disclosure in our 10-Qs and 10-Ks regarding various factors that may impact these results. I'll now turn the call over to Bill Lowe to review the results for the September quarter. Bill?

Thank, Ron, and good morning everyone. Once again, the increased demand for xylenes in the US gasoline supply chain, and tight global supply of perixylene, continue to put pressure on raw material pricing throughout the quarter and forced yarn prices up around the world.

Polyester raw material prices in the US rose to above post-Katrina levels during the quarter, and prices hit a 15-year high in the month of September. Although we've been successful in passing through these price increases on our products, volume slowed in the US and China during September, as many fabric mills resisted, and subsequently reduced orders by working off inventories.

The rising cost of raw materials also resulted in approximately a $1.5 million unexpected LIFO charge in the quarter, which negatively impacted our EBITDA for the quarter. And I'll talk more about EBITDA later in the call.

We realize that you're probably as frustrated as we are to hear that raw material price once again increased. And this quarter did have an impact on volumes. The good news is, we believe, and industry experts agree, that we appear to have finally hit the peak. Several supply and demand factors, Lower consumer demand for gasoline with the end of the US summer driving season, and the fall in Asian raw material demand, has helped to ease pressures on raw material pricings in the December quarter. We've already seen a reduction in October, and accordingly, we removed a surcharge on raw material that we put in place during the month of September. With this as a quick backdrop, I'll begin my comments on the financial statements. And if you're following along on the website presentation, we'll begin our comments on slide 3.

Net sales for the current September quarter were $169.9 million, which is a decrease of $13.2 million, or 7.2%, compared to our prior September quarter. In comparison to the prior year September quarter total volume declined about 9.8% on a consolidated basis, which is offset by 2.6% improvement in pricing.

To better illustrate the effects of the increase in raw material pricing, polyester net sale volume decreased 9.4% in the September quarter, primarily in the month of September, compared to the June quarter, while nylon net sales volume increased 7%, indicating that raw material issues have not affected our nylon business.

Within the polyester segment, we're in the process of finalizing some long-term supply agreements with customers and suppliers that would integrate their vertical production, and move the volume to our dye facilities. The volume associated with these agreements would exceed the volume loss we previously noted with the loss of the [Collins and Egman] business, and would return out dye house to near-budgeted levels.

Consistent with our announced strategy of domestic market consolidation, we'll continue to look for these types of additional integration opportunities. In our nylon segment, improved efficiencies stemming from the consolidation of our manufacturing operations into our larger and more modern facilities have resulted in decreased conversion costs, as a percent of sales, for the current quarter, compared to the prior year's September quarter. These lower conversion costs contributed to our overall gross margin for the September quarter of 5.3%, which is an improvement from the 4.6% for the prior year's September quarter, and total gross margin dollars increased about $0.6 million.

We're reporting a pre-tax loss from continuing operations of $12.1 million for the current September quarter, which compares to a pre-tax loss of $5 million for the prior year's September quarter.

Our after-tax basis, we're reporting a loss from continuing operations of $11 million, or $0.21 per share for the current September quarter, which compares to an after-tax loss of $4.8 million, or $0.09 per share loss, for the prior year's September quarter.

Net income for the September quarter, including discontinued operations, was a net loss of $11.1 million, or $0.21 per share, which compares to a net loss of $3.1 million, or $0.06 per share loss, for the prior year's September quarter.

The primary drivers affecting both net income versus the prior year comparable quarter, is an increase in bad debts of approximately $1 million. Higher interest expense of $1.3 on our new bond issue, and losses from equity affiliates of $3.8 million over the prior year, and non-cash charges associated with stock options under the new accounting rules, and other non-cash compensation charges of $2.1 million. We also took a non-cash repairment charge on a facility which was previously leased, and is now held for sale, in the amount of $1.2 million.

SG&A expenses as a percent of sales were 6.6% in the current September quarter, which represents an increase over the 5.7% from the prior year's September quarter. However, included in the current quarter is the $2.1 million in non-cash expenditures, that I just mentioned, related to the issuance of stock options, issued to officers and a select group of top management employees, as well as the replacement of the Company's deferred compensation plan, for certain employees and officers, both of which we discussed during our last conference call.

Excluding these non-cash expenditures, SG&A expenses as a percent of sales were 5.4% in the current quarter, which is a slight reductions from the prior year's September quarter, of the 5.7% reported for June.

Details on our balance sheet can be found on the next slide, which is slide 4. Cash on hand at the end of September quarter was $29.5 million; reflects a decrease of $5.8 million compared to the $35.3 million cash on hand at the end of June. Networking capital balances increased $2.5 million from the end of the June quarter.

Inventory was at $115.5 million at the end of September quarter.

Turning to slide 5, we're reporting $10.4 million on EBITDA for September quarter, which is slightly below the $11 or $12 million estimate provided to you at the end of the June quarter. Absent the $1.5 million LIFO charge, and the bad debt charges, EBITDA for the current quarter would have been just above that range. At present, we are not planning to revise our 2007 fiscal year EBITDA estimate, of the $58 to $65 million range, until our January earnings call, at which time we'll be a better to accept the impact of the expected raw material price decline.

We're projecting the December quarter will look similar to September and fall in the $10 to $12 million range of EBITDA. Based on September and forecasts of December results, we believe we're about $4 million behind expected results. However, we expect improvements from falling raw material prices, which will have related impact on the LIFO reserve, and a decrease potentially in the bad debt expense. Just recently a couple of significant customers have completed refinancings, and are expected to improve our receivables picture with them, which may result in a need to reduce our bad debt reserve.

We also expect lower pricing to positively impact volumes, and we should return to near-budgeted levels over the coming months. Should these events occur or develop during the December quarter we will likely beat the $10 to $12 million guidance. Should they not occur, we would anticipate adjusting our EBITDA forecast accordingly.

This concludes my remarks on the financial statements. I would now like to turn the call over to Brian Parke, Chairman and CEO for Unifi, who will update you on the status of the Company's joint venture in China, and some recent developments. Brian?

Thanks, Bill. Good morning, everybody. Before I discuss the announcement made earlier today regarding our strategic alternatives, I would like to provide a brief update on China.

We have now completed our first full year of business, and although it has taken longer than anticipated, we have now achieved our goal of producing consistent high-quality yarns. Several months ago we launched the commercial availability of our branded products. And these yarns are being featured this week at the Shanghai apparel fabric show, which attracts more than 45,000 garment manufacturers, import and export corporations, together with the powergrands and retailers.

Our focus now, and for the next 6 months, is to continue developing a more profitable customer base, by focusing our efforts on the high-end fabric producers, with high potential to utilize our products. These companies can be either domestic brands or those producing export programs for the US, Japan, and Europe. We're currently working with more than 40 selected companies, who have existing relationships with western brands and retailers, and who need the quality performance our yarns provide. These customers are also interested in split or balanced sourcing options, and the ability to source the same quality performance yarns in China the Americas is a major advantage that we provide. These customers are in the process of developing and presenting their fall-winter 2007 lines. And success with these lines means that yarn shipments will typically begin in April-May of next year.

While we're doing everything we can to fast-track this development cycle, there are few real short cuts to take. However, once the line is adopted, it also represents continuous business that will repeat yearly, provided we perform.

Consequently, our main focus today is on developing relationships with these customers in order to build a sustainable long-term business. We're making solid progress in this effort, although we do recognize it will take time to become a primary supplier of where our products are specified by the retailers of brands.

This is where I've been spending most of my time the last few months, and I will continue to spend the majority of my time in the marketplace over the coming months. As you know, both management and Board of Directors announced that a key strategy for the Company would be the pursuit of selected consolidation opportunities in our domestic yarn market.

The Company issued a press release yesterday, announcing that the Unifi's agreed to acquire the assets of Dillon Yarn Corporation related to their operation in Dillon, South Carolina. Dillon Corporation is a privately held company and operates at a facility in Dillon, South Carolina, and texturizes approximately 90 billion pounds of polyester and nylon combined. Annual sales were approximately $130 million for the period ended December 2005.

Once combined, approximately $40 million of Unifi's sales will become intercompany sales, as Unifi currently supplies such volumes to Dillon as POY sales. Synergies generated from the transaction of fiscal year 2008 are expected to be in the range of approximately $6 to $8 million. The Company expects this transaction to be accreted to earnings in its fiscal year ending June 2008 of approximately $0.09 per share.

As a result of this transaction, we expect to be able to lower the overall cost of production through operational synergies, which will enable it to better compete both with regional and global competition. That has made significant inroads into the United States market over the past several years. We plan to continue to operate the facility in South Carolina, and streamline the product mix with its existing production facilities. We have entered into a sale and service agreement with the Dillon executives and sales force, to sell products from the facility in South Carolina at our direction, to enable us to continue to serve the existing customer base with the same individuals and provide a seamless transition for customers. Customer service and quality will remain a focal point not just during the transition but as an ongoing effort.

The purchase price is $65 million of which $44.5 million will be cash, and the balance in the issuance of approximately 8.3 million shares. The shares are subject to a lock-up provision. We expect to fund the cash portion of the transaction through cash on hand, and our bank revolver.

We are very pleased to have completed an agreement on this transaction. I look forward to closing this acquisition in early January. We operate in a global market of which we have a small portion and this transaction will help us compete against imports and other global competition.

This concludes our update for the September quarter.

Operator, we would like to now open the floor to questions.

Operator, we're now ready for questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Bryan Hunt.

Thank you. Bill, could you talk about how much cash you want to leave on the balance sheet, after this acquisition, and therefore what you may tap your revolver for?

Yes, we're assuming if you break down the- one of the questions that we always get asked, so I'll just answer the question in advance, about our cash balance -- about half of the cash balance at the end of the quarter was held here in the United States, so approximately between $14.5 million in the US. The way we've derived our accretive EPS or by calculating how much interest expense we'll have on the outstanding revolver, is we've assumed, a conservative way of assuming that the $14 million is used for our general ups and downs in the business. In other words, running the business, and then we'd be into our revolver for essentially the amount of the cash required for the purchase price. And that's how we've calculated our -- the information we've provided so far. And that's fairly conservative because it assumes that it's outstanding for the full year, which it won't be, but for purposes of making it easy that's how we've looked at it. And also conservative.

Okay. In the press release, it listed that you're buying the asset that generates only $130 million in revenues. Are there other assets associated with Dillon Yarns that the Company is not purchasing?

There's no other assets we're not purchasing. However, they also have a distribution or trading business that is outside the scope of products that Unifi produces. So they'll continue to do that. Those are areas in which we do not manufacture, nor are we interested in entering the markets for that. So that they will continue that portion of the business. But it's not from the assets associated with producing multi-filament and nylon yarns.

Could you tell us about what approximately their capacity utilization has been, or was last year, given their sales rate?

As we said in the press release, it's been--they've been running around 90 to 95,000 I'm sorry, 90 to 95 million pounds a year.

And what's that relative to their capacity?

It's probably fairly close. Their capacity could probably be a little bit higher than that, but they're probably running in the low 90% kind of range.

And based on their revenues to their poundage, it doesn't look like there's a significant value-added mix here. Would you say that's a fair statement?

No, actually I think there's a pretty good value-added here from the standpoint of our ability to move some production to our facilities. They have a customer base that's slightly different than ours, and they're very good in the facility there of doing some of those short-run with their customers, which we plan to continue to do that. They have a little different mix than we do, they have very little of the branded PBA products like Sorbtek, A.M.Y., that type of thing. We run more of those of course in [Yakinville] than they do.

It might be helpful if I provided you some detail on how to build up the $0.09 accretiveness, and I think that'd be helpful for everyone on the call. Because I can't give you -- I'm not able to give you a non-GAAP number, so if everyone who's listening on the call has a piece of paper and a pen, and knows how to use a calculator, I'll provide some information to you that might help guide you to see the value of this transaction.

If you take the number of shares that are being issued and so you come up with a pro-forma number of shares of about 60.4 million, and use the $0.09 EPS, use an effective tax rate of about 37.5%, which is effectively a statutory rate, depreciation expense will be approximately $5.1 million. And we've assumed at this point since we've not fully done appraisals, that there's no goodwill in that factor, and we've assumed interest expense on the revolver at about an 8% rate, deriving about $4 million of interest expense, on a top line, before the inter-company sales of about $121 million, of revenue.

So, this is a full-run rate, with synergies, for fiscal 2008. And so if you run that calculation you can come up with a variety of things that might help you determine the value to the Company on the transaction. You'll also determine from that that it's also slightly deleveraging to the Company as well, even with the borrowings under the revolver.

Would your goal be to pay down that revolver balance as quickly as possible?

Yes. Yes, we would. Both from the cash flows currently that are generated from the existing supply business, and the cash flow generated from the acquisition. Let's not also forget that we will be able to add part of the purchase price, it's about $14 to $15 million of inventory. With receivables and inventory added to our revolver, which if you recall, when we redid our revolver, just recently when we did the new bond issue, we have the ability to spring the availability on that revolver in excess of $100 million, up to $150 actually. This will add about $20 million of additional available liquidity, under the revolver, so the revolver liquidity will go from approximately $93 million today, up about $20 million, after the transaction or after we've mover those receivables in inventory into the revolver pot.

Great. One last question and then I'll get back in the queue and ask someone else ask something. A company or an industry player, Delta Woodside, recently filed bankruptcy. I was wondering if you can talk about 1, they were a customer of yours and 2, to what magnitude they were.

Actually, fairly small. I think the amount that we had outstanding with Delta was about $80,000, so it was a very small balance from a Unifi perspective.

Thanks. I'll get back in the queue.

Thanks, Brian.

Our next question comes from Dan Richards.

Yes. This is actually Mark [Fricker] with Dan. Bill, can you speak a little bit to the business that Dillon has that's different from yours? Is it more commodity oriented? What's – how do they differ than what you do?

Well they're somewhat of a mini -- when you look at it, it's kind of like a mini-Unifi. They have a lot of similar products. As I just mentioned they don't run as much of the premium value-added products that we do, although they have some in the FR area, or flame retardency type of product. But they do run a fairly – they've got commodities, they've got some specialties, but not at the premium value level. So it's kind of a small -- with the exception of the PVA products, it's kind of a small microcosm of the Unifi picture.

Okay. I guess that would be my only question at this point.

Alright. Thank you.

Our next question comes from Jason Kremer.

Good morning.

Hi, Jason.

I was wondering, is the acquisition going to be, are you expecting it to be diluted with the 2007 by a penny or two? Just given the share count? Or-

It shouldn't be. Because we're only going to – we probably will only spend, we won't spend that much money on integration. Maybe possibly up to $1 million, as we work through the quarter to integrate some of --maybe if we decide to move some production around. That's really the only expenditure that's going to hit the P&L, so I would expect it to still be slightly positive for the June 2007 period, the January – June 2007 period.

Okay.

Many of the synergies that will come fairly quickly, as you would expect, and it is the majority of the synergies, initially, is the back office synergies that occur in any of these types of acquisitions, where we'll integrate those processes into our Greensborough office, similar to what we did at [Kingston]. If you recall we did Kingston, we eliminated a very significant number, about $10 million, of overhead that they had, into Greensborough.

Since we have an infrastructure that can handle a lot more with adding bodies, our IT infrastructure here is set for a larger Company, since we used to be in a larger, on the top line. So we really don't need to make any significant changes here to absorb those functions, and we'll get those rather rapidly in the first 6 months.

Okay. And you had $14 to $15 million of inventory there, is that what you said?

Of the purchase price, $14 to $15 million of that will be inventory, yes.

But what did they have inventory on hand? That's the same number?

It should be the same number. By the time we -- it's in that range and we expect it stay in that range for the time we bring this to closing in early January.

Okay. And I know that you mentioned you weren't planning to close the plant, but I was wondering, if you did, would it be possible to run all that volume out of your own operation? Do you have enough capacity to run that?

Depending on where our volumes go today, it's possible to get a very a large majority of that into our facilities today, but that is not our intent today. We plan to run the same business model with that facility in place, for the foreseeable future. And it's only if the market would take a severe downturn would we look to make any change in that regard.

Okay. I guess that last question. I was under the impression that prices dropped in China significantly over -- throughout the quarter. Did you guys lose any customers due to this? Or did the delta fluctuate to the negative?

Now you're really off by about a month. China saw the same problem – the good news in the September numbers are the fact that the raw materials of September is China was having the same impact. In fact, China slowed down dramatically in the month of September with the fabric mills pushing back on the raw material prices. Theirs was escalating as rapidly or more rapidly; in fact it was probably changing weekly throughout the month of September.

In October, to your point, in October, both of us have seen significant reductions in raw material price. And that's why I mentioned on the formal part of my remarks that we saw a drop in October, we took the surcharge off in October as a result, and we're expecting over the next 6 months that the gap between Asian prices and US prices would continue to -- would narrow, by the time we reach maybe the March, end of the March quarter.

Okay. I guess that leads me to 1 more question. Sorry. You mentioned that volumes were going to be similar in the coming quarter as they were last quarter. I was wondering, I would expect prices to fall with the raw materials falling, and obviously you took off a surcharge. Why would you not see increased volumes?

Well we will see -- volumes are picking up now. If you recall, this second quarter is somewhat of a short quarter from the standpoint that July and August were fairly good months, we have just a short period of time that operations are down because of the July 4th holiday. However in this quarter we have both the Thanksgiving holiday where people are down, along with December is almost a 2 week month. Which is the way we budget it. It's a 2 week month because many customers shut down for that 2 weeks and we close down production in a variety of areas as well.

I think, and you'll notice in my remarks, while we've forecasted the same kind of range, there's some variables here that could put us at the high end or maybe over the range, depending on how far prices fall. Because we have been – got somewhat hammered on our earnings with the LIFO charge increasing, our LIFO reserve is $9 million today, 9 million and change. And as prices fall, depending on how far they fall, will depend on how much of that LIFO we get back. Of course that's been hitting us, it hit us this quarter $1.5 million, as I said, which was unexpected, because we actually, as you probably did based on the previous information, we all expected prices in September to at least stay flat with August, because with the summer driving season ending that was the expectation of everyone in the industry. Unfortunately they went up another $0.04, in the month of September.

So, yes, volumes are going to pick up because of the decline in prices, we'll get more back on LIFO, and so it depends on how much we get back, how much prices actually do fall in the months of November and December will drive that. And as I said, we may exceed that forecast, but I think over the next six months, kind of the next 2 quarters, between the 2, we're expecting to get back on track with our full-year forecast, on the basis of both declining raw-material prices and increasing volumes, which is directly to your point.

Okay. Thanks a lot. I'll jump back in the queue.

Alright thanks.

Our next call comes from Walter Schneider.

It's Walter [Shenker]. Couple --

Good morning, Walt.

Good morning. Couple of questions. Were you not able, because of competitive reasons, to increase the polyester surcharge as your costs went up?

We did. We pretty much have raised it. There's a certain amount of price elasticity in the marketplace and we have increased our prices along with raw material prices. We've also seen improvements. If you notice, we have seen improvements in our margins over time throughout this last year, which we were seeing dramatic increases in raw materials since the hurricane. So, I think we have improved our position. There is so much price elasticity in the market with competition, which we face. Margins have improved slightly over the timeframe from a year ago September.

And has prices - again [quests] polyester have come down in October. Competition has forced you to reduce the surcharge because it would seem that since you don't make any money in the business, at where you are in October, that you would want to retain higher pricing, just to try and expand margins?

That's a good point. We are not the only supplier of these products in the marketplace. We do have competition and competition is a major factor in what drives in any business. What drives the ultimate pricing that can be obtained for a product.

Okay. Just two other questions. Cut me off, I guess. The equity loss of unconsolidated facilities. How much of that was China? What went into that? Roughly $2 million for the quarter?

About $1.5 million was related to China.

Okay.

There was a small loss, I believe, from Parkdale for the quarter as well.

Which was expected? Or they got squeezed some?

I think cotton prices have behaved a little differently than I think the people in the cotton industry have been expecting and I think that has affected volumes a little bit for them in the quarter along with the impact of their cost structure for raw material.

And obviously there's no update on your desire to do something with the Parkdale position because otherwise you have said something?

Correct. I mean that's -- we're -- my comment would be the same as I've said in the past, we are -- such as we did with Dillon. When we have something that we've completed, that's signed, as we did with Dillon, we will make an announcement accordingly.

And lastly, just on Dillon, they would obviously be subject to the same macro factors as you are as a domestic supplier, meaning declining end markets and some volatility in a competitive margin environment. Basically, you just upped your bet in the domestic business with a fairly similar type of -- reason.

When we talk about where we saw prices it's the region and it's global. We do face global competition. We face competition from imports, but they also have, as I mentioned, they also have a slightly different customer base. We've been traditionally, because of the size of our facilities, we have been servicing in some cases much larger customers and this gives us the ability to be more flexible with who we produce for.

So there is some customer base that they have that we've not been producing for in the past. I think it provides us a lot more flexibility to help us with what we face from a global standpoint and from imports on our ability to compete with that. And to lower our cost structure at the same time to be able to face that same competition.

But when you look at the 2008 forecast of $0.09 which is about $5 million, and the synergies are the vast majority of that, they are actually not expected to earn excluding the synergies some of which are on your side and some are on their side, a material amount of money?

From a net income standpoint?

Yes.

That's right. That's right

Okay. I thank you.

Just to expand on that. We said that one of the reasons we want to look to do that is to take -- looking at capacity standpoint, giving us the flexibility if we needed to consolidate facilities and move production around. Also don't forget in that number, Walter, we have calculated $4 million of interest expense that we've taken directly against that business and not against the Unifi numbers. So that's a stand alone calculation with the impact of the interest expense related to the transaction against the income expected from that acquisition.

But if you weren't using the cash to buy this business, you could give it to me. There are alternatives -

I'm just making the point that we do count that against them.

I understand. Thank you.

All right.

Our next question comes from Mary Ann [Kashmir].

I have a few questions. First of all, Parkdale JV. Could you please comment on the expectation for dividends from the JV? And you said that on net income basis they turn a bit negative. Could you give us a better understanding of actual cash flow generation at Parkdale? How it compares from prior quarters?

They're a very good cash flow generator. My review is unchanged for the year on what we expect dividends from Parkdale.

And what is it? What is that number?

In about the $5 million range.

Is there any upside to that at all. It seems like if you look at how much EBITDA they generated recently and if you're saying that reasonable number, they perhaps could distribute more cash flow. What is their strategy?

Certainly, they might be able to, but that's the number we're using for our projection purposes. Can it be more? Certainly, if they generate more cash. We determine that collectively that there's not a need for it to remain in the business. It could be higher, but we put in our forecast is $5 million.

Okay. And Dillon Yarn. Is the company currently cash flow positive? And since it will be your EBITDA for fiscal year 2007 for six months, what kind of impact would it have on that EBITDA guidance for fiscal year 2007?

As I said earlier, that's a non-GAAP number I can't provide, but if you use the numbers I gave you for the full fiscal year, you might come up with an estimate yourselves of what you think that first six months will be. Again I mention we probably spend about $1 million on integration. From a cash flow standpoint, there will be some additional working capital flows that we would have in it.

But we will update, when we come to our January call, we will update you with a forecast that would include, because we have to close the transaction early January, we will update all of you on what the forecast will be through June, including Dillon. We're also hopeful to be able to put together at that time some pro forma information that we can publish on a public basis that would also give you that detail as well.

Directionally speaking, would Dillon be a neutral event from cash flow perspective for fiscal year 2007? Negative or positive?

It should be positive, but I would expect by a couple million dollars for that period. Not a substantial amount. We have to take off $1 million of integration costs. It should be slightly positive cash flow positive in that first six months.

Okay. And could you explain in a bit greater detail the LIFO charge and maybe you can - you mention LIFO reserve. It was $9 million at the end of September? Is that right?

That's right. About $9 million.

And what was it in June?

June was about $1.5 million less than that. We took a $1.5 million charge this quarter for that and that's all a result of rising raw material prices over time in this last quarter and as raw materials decline, we would expect to see that decline as well come back in the income statement.

Okay. And also, working capital was negative; almost $8 million in the quarter. Is it just changes in receivable / payables? Or are they any other things that flow through that line and when you do expect to get that cash flow back?

The biggest component of that is if you look at the balance sheet is accounts payable. Accounts payable was higher at the end of the June quarter versus September by probably, I think it was probably somewhere around $8 million something. Just one second. That's the majority of it.

A lot of it has to do with timing as well prices. With the prices also being up, our actual inventory pounds were down, so we've done a good job of managing our inventory down on pounds basis, but price is up about $0.18. So from a dollars and cents standpoint that's driven inventory dollars higher.

We did also slow our purchases in September for raw material which has affected the balance for accounts payable because we didn't want to buy at a higher prices like anyone else, and some of our customers did, as I mentioned, their working inventories off. We did the same thing on raw materials and slowed our purchases of raw materials as we saw that price go up, and worked down inventory raw. But it also affected our accounts payable as well. Some of it's the timing of when accounts have to go out the door, depending on the quarter end.

So, based on your comments, you brought down the inventory. So, if anything during the December quarter you'll probably have to rebuild it a little bit?

The hope is to keep it - we'll get an effect on the decrease in pricing in the inventory somewhat. We would hope - one of the things are trying not to do, as we said, that things slowed down in September - what we did not want to do is continue running at a rate that would build inventory. We're going to try to maintain inventories on a pound basis relatively, where we are today. There might be some slight increases but we're not planning to go back and add a lot of pounds to inventory.

Okay. And just last two questions. Really quick ones. Updates on any non core assets sales? There is not a lot left but if you can provide an update. And also an update on export - I'm sorry -on import picture and particularly the trade flows with the Caribbean Basin, NAFTA, China imports, all that stuff.

We still - from a real estate - our assets - we still have about $11 million of real property that's held for sale; about $4, $4.5 million of machinery and equipment. We did not have anything to trade this quarter as I noted in my formal remarks. We did put one more building up to be held for sale that we didn't have held for sale in the past, which was a facility in Rockingham County here that we were leasing to another party. That lease has expired and they've exited the building, so we have put it up for sale. We took an impairment charge on that facility, as we had it appraised just recently.

From an import standpoint, the relatively flat till August. It's been - imports from China are actually down about 4%. The region itself is also down as well a little bit. So, imports really haven't - this issue of slowdown in September it hasn't been a market share standpoint. The imports have not really taken share over the last few months or this quarter. So it's really an unchanged picture on an import basis from apparel standpoint and from a yarn standpoint.

Okay. Thank you.

Our next question comes from Josephine Shay.

Good morning

Hi, Josephine.

Just to be clear, the calculation you gave expected EBITDA contribution of Dillon Yarn. That includes the expected synergies of $6 to $8 million. Is that right?

That's correct.

Okay. Then also could you say what your average net price was in relation to last year? Was it up?

Our - Unifi's, as we raise prices, you mean, as a result of rising raw material prices?

Yes.

From a pricing standpoint, overall consolidated. If you look at consolidated, it's up about 2.5% over the previous period in September on an overall basis.

Right.

Each division would have different numbers.

Sometimes you give those out; sometimes you don't? Are you willing to --?

Yes. I can hang on just one second, Josephine. The biggest change, of course, is as you would expect, is going to in polyester. Nylon has not been affected by this issue because it's a polyester issue. It's the feed-stock ingredient that goes in the PTA that's causing the problem. So prices in our polyester group are actually up 6.3% over, on average, over the prior period. Nylon is down just about 3%.

Okay. Unit volume? Sometimes you give those as well. Polyester, I presume like you said, was down volume-wise?

It is down versus the -- let's just use if you use versus the last June quarter?

Yes.

Polyester was down about 9.4% versus our June quarter and from a nylon standpoint versus June as I mentioned, they're up 7%.

Great. Then the new customers, the 40 customers that you mentioned in China, that are already there. Are those also current customers of Unifi in America?

No. I think the customers that we're talking about are Chinese [inaudible] producers. This is apparel -- woven apparel. But some of them are supplying domestic market, domestic brands. The others are supplying retailer brands in the United States or Europe or in Japan. And we're dealing downstream with our downstream people - we're dealing with the usual brands that we do in the United States, like Nike, Adidas, etc. So we're looking at the same the dual sourcing policy of a lot of the retailers and brands is definitely coming into play as far as in China where we have programs that are sourced to the U.S. where they want to expand those programs. We are working with them through these fabric producers in China, to supply garments back into the same markets, using the same types of yarn that we produce in the U.S.

All right. So maybe I have to rephrase it. You deliver domestically to apparel makers or shoe manufacturers or whatever. Who then supply Nike, lets say? But now you're probably also supplying in China the makers that will eventually go to Nike and that stream you're trying to increase. Is that right?

Yes. First of all, let me just emphasize the fact that our China business is essentially there to supply the Chinese market. The Chinese market as you know is one of the largest in the world from the point of view of garment manufacturers. We are after the top end, tier one, as we call them, suppliers who have the capability to make garments containing fabric that have very high standards. That's typically exported garments going into the brands and retailers in the three regions, the three major regions, consumer regions in the world, namely Japan Europe, and the United States.

The previous sales number you gave for the Chinese joint-venture, I believe was $140 million. Do you already have some kind of indication what it could be for, let's say, next year? Are we talking about a lot of growth or we're still a long way to go before that?

Rather than give you a number that would be more or less a guess at this point, I think the reality is that we have spent a year basically developing the capability of producing fiber that is of a similar quality to that we make here in the U.S. That has taken several a time. At the same time we've been developing our marketing base in China with these types of customers, both direct customers and fabric users, also the brands and retailers where our downstream people are working in the U.S. and in China.

So, it takes a certain amount of time to infiltrate the pipelines. The pipelines exist today where the sourcing companies or retailers, etc. have their own partners who manufacture the garments and the fabric. Those in turn have their own suppliers of yarn. And expressing those and entering into that is where the challenge is, and that's where we've been spending so much of our time developing relationships with these direct customers in China, showing them our capability, running trials with our branded products, our high performance products, and proving to them that we bring value which they can't get elsewhere.

That's what we've been working on. That's where we are making a lot of progress, have made a lot of progress. We've got 40-odd tier one customers that we're currently working with. Some are taking volumes already; some are in the process of developing their lines, which they then show to their customers with a [you too] having that line accepted and then put into either their spring/summer or fall/winter seasons next year.

So the process of developing a traction with these customers is where we're working. We've got the product. We've got the capability manufacturing wise. And it's a question of being able to get that traction and start growing the business.

Now, what that's going to look like in terms of top line? I don't want to hazard the guess right now on that, but the end of this quarter we'll have a better view of what the next calendar year looks like.

Okay. That sounds good. So it's kind of a certification process almost that you need to go through which can take probably up to a year?

Yes. You've got to validate your credibility. We have that credibility here in the United States and the region generally. We have that also with people, the brands and retailers, but we have to build the same credibility with the actual fabric producer in China.

Okay.

By and large, who are OEM type companies.

Thank you very much.

Thank you.

Our next question comes from Alan [Splitcliff].

Hi, good morning.

Hi, Alan.

How are you?

Good.

Most people have beaten some of these things to death, but let me just try to get a little elaboration. One, in no particular order, the equipment at the acquired, at the company you're acquiring, is it in - compared to Unifi's equipment, is it better, worse, same? Can you give an overall impression of what you're buying? Because you talk about assets.

It's similar equipment. It's maintained well. We certainly looked at the equipment so we're not expecting to have to go in and spend money to improve maintenance on the equipment and that kind of thing. They have state of the art equipment just as we do; very similar equipment.

Okay. I don't know the company. Was this a family run company? Or something like that? Or was it an LVO? And the reason I ask, is I want to get a sense of what the SG&A was and whether that's where you see the opportunity.

It is a family - it is a privately held company and has always been. A substantial portion of the initial synergies does come from the combination through the overhead and our absorption of that. Of about, on a full year basis, once it's fully integrated, about $5 million to $5.3 million is our estimate.

So it may just be that some of the people that work there are family and they may move on, take your stock and hopefully cash out at $10. Right? Something like that?

Not that there's a lot of family members working on it. Again, they have a location outside of Dillon, South Carolina where they did all the back office things; all the receivables, payables, the processing part of it. A lot of that occurs outside of the manufacturing facility, which is not unusual. That's how we do it here.

Right.

That office is not coming as a part of the transaction.

Right.

And they will have an existing business that survives this as I said earlier, that's not a part of this. It's a training distribution business. They will determine what they do with their offices there. That's not coming as a part of this. We'll pick up all that integration here in Greensboro and I really don't expect to add any cost associated with doing that here. So those costs will be eliminated very quickly in the first few months.

What I'm trying to get at with the question is, how does one determine the price of an asset like this given that you will probably, I'm guessing you're probably the only buyer? So, I know you don't want to give out pro forma information, but why did you pay X instead of Y? I'm just a little unclear as to how one determines what the price of an asset is when you're in a declining business and run by family. Could you maybe help us with that?

Well, there's a lot of things that go through the negotiating process and I won't get into that. We feel that -- and again we did ask Lehman Brothers to provide a fairness opinion to the Board of Directors. We looked at in a number of different ways, along with what it generates for the future for us; the flexibility, the amount of cash flow that will generate over time and the cash that comes in and the ability allows us to do some things in the future that we would not be able to do without the combination. All that goes into play in any acquisition.

So we believe that it's a - we know it's a fair price based upon what the expectations are going forward. It's a fair multiple which you can calculate based on the numbers that I have provided on a GAAP basis. And it's slightly de-leveraging, even with using the revolver to do the transaction.

Okay. And when you say they sell to different customers, do they have any large customers; meaning is there one or two customers that are half their business or anything like that?

No, we do have - I don't want to mislead you from the standpoint, we do have a number of common customers as well. But there are some customers as I mentioned earlier that we don't sell to. They have quite a few customers. They have several hundred customers in their business. There really isn't any 4 or 5 that represent the majority of that business. There's over 400 customers, actually.

Okay. And just lastly, to our favorite topic, China, the $1.5 million loss that you incurred in the first quarter. Was that better or worse than you expected? Going back from the last call?

Well, as I mentioned, this is taken from our forecast standpoint. We were not expecting two things that did affect our numbers, which was the LIFO charge because we expected at the time based upon all industry experts that September prices would be flat with August at best. That was their best case scenario. It wasn't going to change much, but it did change. So we did not forecast that we would have $1.5 million impact in our LIFO.

But that has nothing to do with China right?

China?

In China you had a LIFO charge?

No. Sorry, that's my mistake. I thought you were talking about the domestic business.

No. I'm just trying to understand the delta in China and whether you had -- what you were expecting versus what you actually incurred. Occurred.

It was - the amount that we had, I believe for a run rate basis is very similar to what the number came in. It might be a couple hundred thousand dollars higher than we expect, but not significantly different than what the expectations were. Brian, if you want to comment further on that?

I think, as Bill said earlier on, I think the raw materials had an adverse affect on not only the U.S. business but on the China business.

Right. I understand that. But if you put that aside because you can't control that, I'm talking about the things you can control. There wasn't much of a variation. Is that fair?

That's fair. Yes.

And you're still forecasting the same - you still have the same sense of the reality of that business as you had from the last conference call in terms of what it looks like for the next 9 months?

We do, but I can't ignore the fact that we've had a major hiccup on the raw materials.

But that's not your fault.

It's still a factor. It still shows up in the numbers.

Oh, no, no, no. But you understand where I'm coming from. There things you can control and there are things you can't.

My last question, and then all I'll give the floor up. When you talk about $0.08 accretion in the 2008 year, fiscal June 2008, I'm just intrigued by you being able to look out to 2008 and see a company that you don't own yet have positive earnings and yet you're running the Company today, Unifi Old I'm going to call it, and you're losing money. So what am I missing here? Is there some sense that you feel that your business is going to get better and the $0.08 is going to be added to a plus or is it going to be a smaller minus?

It's two things. One is, again, this is the $0.09 that we quoted was specifically related to the volumes associated with Dillon.

Right.

Of which we plan through the moving some product around to keep that facility running full so it's maintaining its volumes and absorbing all the fixed overhead there. And then a big piece of that is the synergies that we will generate from the combination of the two of those that drives a large majority of that, there's no doubt. And the good news is that the majority of that is the very easy things that's going to happen through the overhead consolidation. They're not hard to reach. They're not the difficulty-

I appreciate that. But do you understand where I'm trying to get at? We've been running a business with a loss for quite a while and so I'm hopeful, and I'm sure everybody on the call is, that there's some degree of confidence that the rest of what I'll call Unifi Old Domestic will be profitable at that point. Is that what one should walk away with by you spending some money to buy another facility? Do you see what I'm trying to get at? Because otherwise, it isn't justifiable to a shareholder, in my opinion.

It's going to add value to the combined entity and also through the fact of picking up additional POI sales that we don't have today. In the future, we don't supply all the raw material at this point.

We haven't done our 2008 budget, but it's going to add value when we combine together to be able to add more flexibility to help our current operations be more efficient. And synergies do generate a lot of that $0.09. Without it stand alone, it would be just slightly above break even. So it isn't going to drive Unifi to be - to put another $0.10 or $0.15 a share on Unifi, but it is going to give us a lot more flexibility to drive our business towards a positive EPS.

Okay. So it's not -

The whole consolidation strategy is based on the fact that the market, as you said quite rightly, is declining.

Right.

Our assets out there and [all possibly of its chain] that are not fully utilized carrying the same sort of SG&A on overhead when they had 20% or 30% more volume in sales.

I appreciate that, but one has to appreciate the fact that if you're just buying this to get $0.08 of earnings, and the rest of the business loses $0.08, and I'm not making that projection because God knows I don't know. It's really kind of depends on where you see the business going. That's the one missing piece that I'm not getting out of this, out of what the sense is of making the deal. Is it that you think that by buying this in a declining industry, your business is going to grow profitable at a time when it's not profitable now? I just would like to have that comfort or at least the understanding of it.

I think you can go back to our projections for the fiscal year when you ran the numbers you would end up back on budget. You'd see that the business, our existing business for even fiscal 2007, was slightly at the break even or a penny plus or a penny minus. And so with added flexibility we would expect to see that to be able to improve; absent things that we can't see today.

I fully understand that. This is more of what you can control.

Yes, so what we can control we believe that when you go back and we made the statement that we're expecting to get back on budget and if you look at that -- what we projected for the year, and actually provide that detail, I think, on the filing, it is slightly just right at the break even line without any acquisitions going forward.

So with that additional flexibility, we're hoping to get over that threshold and break above that break even line on a Unifi basis, even without counting Dillon. And we'll provide a much better forecast as we get to our January timeframe, but our goal is to get the existing business absent, put aside the Dillon acquisition, has been to get the rest of the business profitable. This will help us do that.

Okay. I'm sorry to belabor the point, but you see where I was going here? I hope.

No problem. And Operator, we have time for one more question.

Our last question will be coming from John Deysher.

That's Deysher. Good morning, everyone.

Hi, John.

I made the cut-off. That's good.

We're 10 minutes over, but I'm happy to go over.

Okay, thank you. I'm grateful. Couple questions, Bill. One, are you going to file an 8K for the Dillon transaction? And will be numbers in there?

We are going to file an 8K with the appropriate documentation we have to file, but there won't be any pro formas in that 8K at this point. We'll do that at closing. When we get to the closing time, we'll provide pro-forma information.

Were there other bidders for Dillon?

This was a private transaction worked out between the two of us. I'm not aware that there was other individuals involved, either in the past or during our negotiations.

Okay. So it was not an auction?

No, it was not.

Okay. You mentioned there was no goodwill associated with the transaction. Do you anticipate negative goodwill?

Well, what I said is, for purposes of our estimate, I assume no goodwill. We have to actually - now that we actually signed the agreements, we have to perform the appraisals on the assets and we'll work through that process. By the time we provide the pro-forma information we'll have all that detail. So we actually assumed that everything, in one form or the other, is either depreciable or amortizable in determining that $5.1 million I gave you for depreciation at this point. I don't know until the appraisals come in if that will change that at this point. We don't believe that at the moment. We haven't done any formal appraisals.

Stepping back to the big picture, what's the mix of the domestic Unifi business combined with Dillon? You used to give these numbers, but I haven't seen the percentages, I should say.

Let's look at it - we really, from our standpoint the markets are much broader. It'sreally a regional market. And our regional market with Dillon would be about 1/3 of the regional marketplace. So that's about - that's how we view our market. We talked to you many times about the region, the NAFTA region producers and customers and suppliers. That's about where we've come out we take the whole region.

My specific question was breakdown of apparel, automotive, home furnishings and other.

Not able to provide you at this time the combination, but it's very similar, from that standpoint. They do supply into the same markets we do with apparel. Our numbers that we had if you look at some of our data that's public out there - we were about 34% apparel, 20% home furnishings, 12% automotive. They're going to be going into the buckets of apparel and home furnishings, not really so much in automotive because that's mostly coming out or dye house. And probably a little bit industrial as well. So probably apparel, home furnishings, industrial is going to be the areas that they're going to fall into when we combine.

Back to China for a second. You mentioned your share of the loss was $1.5 million. What were sales for the JV in Q1?

I don't have it right here. If that's a particular interest you, John, if you want to give us a call after this call, we'll pull out those financials and give that number.

Okay. I'll call you. And finally - excuse me?

I was looking. I think I have it [inaudible]. Just give me - Go ahead.

Next question? Brian might be able to give it to us while you're still on the call.

The provision for bad debt, the $1.6 million. Who was that primarily?

I'm not going to mention specific customers, but as we ended the quarter there was a couple of as I mentioned, we do our [inaudible] in the past we try to identify risk and separate those out from our general reserve. They're primarily, as I mentioned last quarter, I think it was actually Bryan Hunt who asked the question of home furnishings industry and whether we had any issues on credit with any of those customers and throughout the quarter as their receivables built up a bit, we had some concern about them and adjusted our reserve accordingly.

Post closing, they have - one has refinanced the other is in the process and we'll have it in place, I understand, in about three weeks. And so, we expect at the end of this quarter, this December quarter, by the way, that their liquidity will allow them to get their receivables back in line. But at the time of the quarter, it was necessary for us to look at it at that date and assess the risk of those customers at the time. So it's possible with their new financing that we'll see those come back in line. Just running our regular calculation will give us probably a different result then we saw at the end of September.

So, they were both in home furnishings?

They're both in home furnishings.

Thanks.

The number for China was about $33 million U.S. currency.

$33 million to $34 million in U.S. currency.

What was Q4, if you have that? I know the loss was greater in Q4, $3.9 million, but do you know what the sales were in Q4?

They were pretty much similar to that.

Okay. Bill, I'll follow up with you offline about that.

Thank you. All right. With that being the last question, I apologize for any of you who might still be in the queue. We have run over about 15 minutes of our normal time frame, which we were more than happy to do.

But we appreciate everyone being on the call today. We look forward to moving forward with our acquisition and we appreciate your support going forward. And we'll talk to again next quarter. Thank you very much.

Thank you.

This concludes today's Unifi First Quarter Conference Call. You may now disconnect.